5. Financing Cash Flows

Let's look at the financing section of the statement of cash flows. You should remember by now that we've got the operating section, the investing section, and the one we're talking about now, which is financing. Investing and financing are kind of similar in that they both start from 0. With operating, we started from net income. You can start from 0, but using the indirect method, you always start from net income, and that's the method we use the most often. So just like investing, financing, you start at 0.

And again, just like the investing section, you have cash receipts from some stuff, and you have cash payments for some stuff. Now, when we're in the financing section, we need to think about what kinds of activities are financing activities. From the rest of the class, you should remember that financing activities are things like issuing bonds or issuing stock. These activities are long-term, and they give you a huge influx of cash. They're ways that you finance your business. You can issue bonds, which is basically long-term debt, or you can issue stock, which is equity ownership in your company. So that makes the financing section of the cash flows pretty easy.

You have cash receipts from issuance of bonds and cash receipts from issuance of stock. Then down here on the payments, you have the payment of long-term debt, but it should be noted that here, this is principal only. The principal is the financing part. The interest is an operating part. So when you see payments of long-term debt, which is also when you see payments towards bond payable, make sure that you're only recording the principal, not the actual interest.

Then you could have cash payment for the purchase of treasury stock. Notice so far we've got bonds, bonds, stock, stock. So you can see that there's a theme here. If you get cash for bonds or if you pay cash for bonds, if you get cash for issuing stock or if you pay cash to buy some of your stock back. But down here, we also have a third one. We have the payment of a cash dividend.

And this is related very closely with stock. So these two are kind of together in that they match up with this stock one here. When you pay a cash dividend, obviously your cash is going to go down. So that needs to be one of your cash payments. And it's in the financing section because it has to do with stock. That's all there is to the financing section of the statement of cash flows. You add all of the receipts and you subtract all of the payments. The only thing that I think may be tricky is this guy here. Make sure that you're not including any interest payments down here in the financing section.